Household Saving in America, Britain, and Australia At An All Time Low

In his ground breaking General Theory of Employment, Interest, and Money (1936), written at the time of the great depression, John Maynard Keynes created the policy tools for world economic growth in the post war period.

At a time of intense depression in the thirties, the goal of full employment when there was mass unemployment was like reaching for the stars. So the emphasis put on the consumption function, and government investment in infrastructure to get the economies moving was right and proper. At that time, Keynes’s view on saving as playing no positive role in supplying funds for investment was quite a practical proposition.

Seventy years later, the world is a different place. Near full employment is comparatively easier to achieve, but unfortunately it always seems to be accompanied by rising inflation. Now the emphasis is on expanding saving to restrain excessive consumption.

Saving in Asian countries has always been high, at least partly to provide for medical and other social services, which are not supplied by government. The only exception to this rule is that after many years of growth and increased consumption, saving has been falling steadily in Japan. In 2005, the Japanese household saving rate was down to only 3.2 per cent of household income, compared with 15 per cent in the early 1990s.

But the really profligate countries, as recorded by the Economist in 2005, are the five one time Anglo Saxon but now more multicultural, – America, Canada, Britain, Australia and New Zealand. These five, we’ll call them the spendthrift five – have the lowest rates of household saving of all the advanced countries.

To take an invidious comparison between thrift and spendthrift, among European countries France and Germany are the shining thrift twins. In 2005, net household saving as measured by the OECD in Paris was for France a surplus of 11.5 per cent, and for Germany, a surplus of 10.7 per cent.

For the spendthrift five, only one- Canada has a surplus in net household saving terms. In 2005, this was a surplus of 1.2 per cent, while America was in negative territory at -0.4 per cent and Britain at -0.1 per cent. The 2004 comparison for Australia was -3.7 per cent, but there has been some improvement since then. For New Zealand, the figures are mixed, but on one privately researched measure it could be at low as -17 per cent in 2006.

When you add federal government budget surpluses, which adds to net saving, while deficits in economic terms constitutes dissaving, of the spendthrift five America is on its own. If you compare United States with Canada, George Bush’s budget deficit in 2007 was over 3 per cent to GDP, while Canada had a budget surplus of over 1 per cent. The other three spendthrifts are running budget surpluses.

All the OECD countries have witnessed a run down in saving since the early 1980s, but in the spendthrift five, the run down has been at a much faster rate. Add in the demographic changes, which are rapidly occurring in the coming decade with the aging of the population, the saving dilemma becomes more acute as the years go by.

Four of the five spendthrifts have been running current account deficits for many years. This is the equivalent of net dissaving, as foreign capital has to be cajoled in making up for the deficiency in national saving.  Canada is the lone exception with many years of external surplus, with the only blemish in 2008-09 when it will run into deficit.

American politicians are becoming quite vocal in criticism of foreign capital buying into icon assets such as prominent banks.  The criticism is now moving into a full fledge backlash campaign. Apparently, it is ok for foreigners, particularly Asian and Middle East sovereign wealth funds to prop up the American Treasury in becoming the principal buyer of government securities.

But tottering banks buffeted by the winds of the international credit crunch should be sacrosanct. It may come as a surprise to the politicians that some of the banks involved are desperate for foreign capital, and there are few domestic investors prepared for the risks involved in taking up more stock.

A Brookings Institution study in 2006 had the title- Saving for the 21st Century: Is America Saving Enough to be Competitive in the Global Marketplace? The question really answers itself. In 2008, America is slipping behind, and it will fall more significantly behind in coming years, unless there is a transformation in saving. It all starts with individuals and spreads to governments, if the will of the people are prepared for the struggle to force increased saving.

The fictional character Wilkins Micawber from David Copperfield, who always lived in hopeful expectation was modelled on the author’s own father John Dickens, who was imprisoned in a debtor’s prison for failure to pay his debts. The result were these immortal words: “annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

Fortunately, there is no longer debtor prisons, otherwise there would be no place for the thieves and murderers. As someone once said: “the habit of saving is itself an education.”
For those living in the five spendthrift countries, and that includes the politicians need that education now. Time is too short to dilly dally.

This report has been commissioned by Scrooge in the belief that it is better at a time of negative saving to respect thrift than be a spendthrift.

Why Americans Are Not Saving

An article by Jeffrey Strain (www.thestreet.com) January 15 2008, on “why you’re not saving enough, here’s why” pointed out that the US savings rate for November 2007as a proportion of disposable income was a negative 0.5 per cent.  

This compared with a meagre positive savings rate of 1.8 per cent in 2004, and by contrast, a healthy 4.8 per cent savings rate in 1994, and a robust 10.8 per cent savings rate in 1984. 

Stephen Roach, the chairman of Morgan Stanley Asia (“America’s inflated asset prices must fall” Financial Times January 7 2008) says that the chronic shortage in domestic saving has a compounded impact, with a record 133 per cent of disposable personal income going into household debt. 

Why is America going backward? True, the rest of the world is happy to run large savings surpluses to America in return for US securities, US equities, US companies, US real estate.  

Citigroup, America’s largest bank by asset size and Merrill Lynch, America’s largest stockbroker are very dependent on foreign state-backed sovereign wealth funds for substantial equity injections to keep them afloat. Yet American politicians go out of their way to be suspicious about the motives of these sovereign funds. But as Stephen Roach points out, for a saving-short nation “can beggars really afford to be so choosy.” 

As the statistics on savings showed, the shortfall in household savings started in the 1980s, fuelled by the deregulation of banking in the 1970s and 1980s, which encouraged a large wave of bank consolidation. Along with the collapse of savings and loan institutions in the 1980s, bank lending restrictions were eased which encouraged more consumer spending at the expense of saving.  

Baby boomer homeowners (born between 1948 and 1964) began to cash in part of the equity in their homes in exchange for additional spending on personal consumption. Along with the fall in interest rates following the brief recession in 2000, the long bull run in the stock markets, and the bubble in house prices allowed home owners to cash in substantial capital gains for even greater consumption levels. The beginning of the end came in calendar 2007, when private consumption reached a record 72 per cent of (inflation adjusted) gross domestic product. 

With the economic tide now moving against America in falling house prices, weak employment levels, and near recessionary conditions, the outlook is highly uncertain with the likelihood of being in one of the most severe market corrections in living memory. The people most affected are the Gen X-ers (born between 1964 and 1982), and Gen Y-ers, (born between 1982 and 2000). Many Gen Xers have fallen so far behind in their mortgage repayments as to losing their homes entirely.  

The older Gen Y-ers are burdened with large student debts, which will take many years to repay, and with many Y-ers, who have started their own businesses, the times are getting tougher, with the availability of credit becoming very rationed, as the international credit markets are in a tight squeeze – see Been Around The Block for an enlightened commentary.

 The moral of the darkening economic climate is to resolve to go back to older times when people saved rather than spent all their disposable income. You need to resolve to save at least 10 per cent of your after tax income if you want to have some financial independence in later life. It’s never too late to start. 

This report is presented by Scrooge in the interests of enhancing your financial wellbeing.       

Is Gen Y the most pampered generation in history?

It ceases to surprise that so many “experts” are now employed as consultants to advise bosses on suitability of Gen Y candidates for their firm.

Lisa Belkin in a lively story for the New York Times (July 26 2007 “When Whippersnappers and Geezers Collide?”) quoted one of the legion of consultants saying ‘Gen Y is the most pampered generation of all.’

There is broad agreement that the oldest of the Gen Y-ers, those nearing their 30s, don’t work as hard as their Gen X parents. Indeed, Lisa Belkin hit on memorable words. “Gen Y are as single-minded in their search for (work life) balance as their parents were in their quest for success.”

An Australian funds management firm after a market survey on Gen Y-ers concluded in November 2007 that 83 per of Gen Y women planned to live off their partner after they turned 50. In the new balance of the sexes, 73 per cent of Gen Y men also planned to do the same.

The joke is that with the divorce rate quickening, one in three marriages go on the rocks for Aussies, and for Americans one in two, who is going to be left to pick up the bills.

Scrooge is dedicated to a return to the old fashioned virtue of saving and not using your plastic cards, at least for the coming Christmas shopping spree.

Perhaps it is too scary to expect the pampered, creative, internet savvy Gen Y to save. There is a similarity with alcoholics. They need their first drink to settle their nerves, before they say they will stop after the next drink.

Don’t be like the drunk, just stop spending.

The scary financial story and Gen Y

A scary financial story. It is about the excessive greed of the largest financial institutions in America and Europe, which has bounced back on them, leading to a potentially massive loss of net worth.

They created very dangerous toxic securities, virtual time bombs ready to explode. The joke is that some of the bombs are beginning to explode in their face.

We are talking of a minimum of US$100 billion and a maximum of US$ 500 billion, more likely to be around US$250 billion, which will have to be written off. Just think of the number of Ipods, Iphones and all the other gizmos you could buy with all that pile.

Gen Y-ers, those born between 1979 and 1998, so that the older ones are around 28, the highly creative digital generation, tech-savvy, their playground the internet, but a bit irresponsible as well.

One Newsweek writer described them as “Narcissists in Neverland”-working less, volunteering more, and financially very dependent on their parents.

What does the coming financial mess mean for Gen Y?

Only this.  If your parents begin to find their securities fall more heavily in value than they expected, and are left short, they may fall short in continuing to support you.

Now, isn’t that scary!

Being Scrooge at this time!

The Scrooge Approach is all about trumpeting old fashioned values like saving, being prudent, doing things for others.

Boring stuff I hear you say. Sure is, but that’s life for you.

Americans, Canadians, Australians, Irish, New Zealanders like to spend and spend. They like to spend rather than save.

But the big prize for spending and not saving goes to the Americans. They top the list. The good old US of A is in hock to the rest of the world, big time, the world’s biggest debtor to other countries. And George Bush keeps spending other people’s money.

Scrooge would like you to refrain from using your plastic this Christmas time. You don’t have to destroy your credit cards, just lock them away for the festive season.

You, Gen Y-ers, the creative digital users turned on by Photoshop, Flash, Dreamworker etc show your skill in design and impress your folks with the results. You say you’re creative. Well prove it.

For a US economy teetering on the edge of a recession, with the greenback tanking, and the smart money moving to China and other Asia, there is only one thing to do. Save don’t spend. And if your folks think of you as skinflinted, blame it on Scrooge. He can take it.